The performance of many dividend stocks during past periods of rising rates may surprise you.
At first blush, dividend-paying stocks would appear susceptible to losses as yields on competing income sources rise. These stocks do tend to decline in the early stages of a period of rising rates as investors weigh the length and severity of rate tightening. Yet a study of high dividend stocks by Morgan Stanley Capital International (MSCI) going back to 1927 found that in markets where the fed funds rate is below 3% at the start of a rate tightening cycle, these stocks outperformed the market by an average of 2.4% per year. The impact of higher rates may be tempered by two other factors: the low absolute rate environment that we have experienced since the global financial crisis and a general overweight to bonds.
Longer term, not all dividend stocks will be impacted equally by higher rates. Stocks that pay a static dividend have fared worse in past tightening cycles than companies that consistently grow their dividends. Meanwhile, stocks of companies forced to cut their dividends have underperformed stocks that pay no dividend.
One potential way to cushion this rate impact is by targeting companies with a track record of dividend increases and the combination of financial strength and growth which should enable them to continue raising their dividend payments. These companies typically feature healthy balance sheets and consistent cash flows that provide plenty of capital to effectively operate their business and fund a growing dividend.
For more insight on how dividend growers can thrive in rising rate environment, read the full report.